In a perfectly competitive market, firms are price takers, meaning they have no control over the market price and must accept it as given. The market price is determined by the intersection of demand and supply in the market. In perfect competition, each firm assumes it can sell all of its output at the market price.
Key Facts
- Perfectly competitive firms are price takers, meaning they have no control over the market price and must accept it as given.
- The market price is determined by the intersection of demand and supply in the market.
- In perfect competition, each firm assumes it can sell all of its output at the market price.
- Average revenue is calculated by dividing total revenue by the quantity of output sold.
- For a perfectly competitive firm, average revenue is equal to the market price.
- The average revenue curve for a perfectly competitive firm is a horizontal line at the market price.
Average Revenue and its Calculation
Average revenue is calculated by dividing total revenue by the quantity of output sold. For a perfectly competitive firm, average revenue is equal to the market price. This is because the market price is the price at which the firm can sell all of its output.
Horizontal Average Revenue Curve
The average revenue curve for a perfectly competitive firm is a horizontal line at the market price. This is because the average revenue curve shows the relationship between average revenue and the quantity of output sold. Since the market price is constant for a perfectly competitive firm, the average revenue curve is also constant.
Conclusion
The average revenue curve for a perfectly competitive firm is horizontal because the firm is a price taker and can sell all of its output at the market price. This means that the average revenue curve is simply a horizontal line at the market price.
References:
- MyTutor. (2023, January 18). Explain why the average and marginal revenue curves for a perfectly competitive firm are horizontal while those of a monopoly slope downwards. MyTutor. https://www.mytutor.co.uk/answers/19851/A-Level/Economics/Explain-why-the-average-and-marginal-revenue-curves-for-a-perfectly-competitive-firm-are-horizontal-while-those-of-a-monopoly-slope-downwards/
- AmosWEB LLC. (2023, January 28). AVERAGE REVENUE CURVE. AmosWEB. https://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=average+revenue+curve
- Lumen Learning. (n.d.). Price and Revenue in a Perfectly Competitive Industry and Firm. Lumen Learning. https://courses.lumenlearning.com/suny-microeconomics/chapter/price-and-revenue-in-a-perfectly-competitive-industry-and-a-perfectly-competitive-firm/
FAQs
What is the average revenue curve?
The average revenue curve shows the relationship between average revenue and the quantity of output sold.
What is average revenue?
Average revenue is calculated by dividing total revenue by the quantity of output sold.
Why is the average revenue curve horizontal for perfectly competitive firms?
The average revenue curve is horizontal for perfectly competitive firms because they are price takers. This means that they have no control over the market price and must accept it as given.
What does the horizontal average revenue curve imply?
The horizontal average revenue curve implies that a perfectly competitive firm can sell all of its output at the market price.
How is the average revenue curve different for a monopoly?
For a monopoly, the average revenue curve is downward sloping. This is because a monopoly has market power and can set its own price.
What determines the market price in perfect competition?
The market price in perfect competition is determined by the intersection of demand and supply.
Can a perfectly competitive firm increase its average revenue?
A perfectly competitive firm cannot increase its average revenue by raising its price. This is because if it raises its price, it will lose customers to other firms that are selling at the market price.
What is the relationship between the average revenue curve and the demand curve for a perfectly competitive firm?
For a perfectly competitive firm, the average revenue curve is the same as the demand curve. This is because the demand curve shows the relationship between the price of a good and the quantity demanded.